Insights

In late October the Massachusetts Attorney General and Division of Banks announced a joint settlement with Western Sky Financial, LLC and companies involved in its small loan program (including CashCall, WS Funding, and Delbert Services Corporation, collectively the "Related Companies"). The settlement is based on allegations that Western Sky, which was a tribal lender based in South Dakota, made high-interest loans without a license in violation of the Massachusetts Small Loan Act and otherwise engaged in allegedly deceptive acts and practices in violation of Massachusetts law. The settlement was preceded by a cease and desist order issued by the Division of Banks in mid-2013.

The Massachusetts Small Loan Act requires the licensure of parties making loans to Massachusetts residents in an amount of $6,000 or less with interest and expenses greater than 12% per year. The act casts a wide licensing net, including not only creditors but also those who arrange/broker, guarantee, or purchase such loans. The involvement of an unlicensed party in any aspect of a small loan process renders the loan void and uncollectible.

Under the terms of the settlement Massachusetts consumers who obtained a Western Sky loan (approximately 4,700 in all) are afforded a wide range of relief:

• Refund of Excess Payments: Consumers who made payments totaling more than the amount borrowed (not including origination or other fees) are eligible for a refund of the overpayment, less 12% interest on the amount borrowed. Refunds will be administered by an approved third party who will notify consumers of their eligibility by Christmas. Consumers will have 30 days to submit a claim for reimbursement. If a refund cannot be made within 8 months the refund amount will be treated as unclaimed property and escheated.
• Loan Modification: Consumers who are ineligible for a refund (because their total remitted payments are less than the amount borrowed) will have the terms of their loan modified to a 24 month repayment schedule, with interest accruing at 12%. Consumers will be notified of their modified loan terms and of their right to pay the remaining balance in full - with no interest or fees - within 60 days. At the end of the 24 month modified repayment schedule the loan is considered to be fully satisfied and must be marked paid in full with a zero balance, apparently without regard to whether the consumer actually made any payments under the modified terms.
• No Credit Reporting: All references to the Western Sky loans must be removed from the consumer's credit reports, and no reports may be made regarding performance under the modified terms.

In addition to consumer redress, the settlement also imposes a number of penalties on Western Sky and the Related Companies. Specifically:

• They are permanently enjoined from engaging in any lending related activity (including brokering/referring, purchasing, selling, servicing, or collecting) in Massachusetts.
• They are permanently enjoined from engaging in any advertising related to loan programs that either targets or is reasonably expected to reach Massachusetts residents.
• They are prohibited from referring Massachusetts residents to other lenders or lead generators, or otherwise selling the personal information of Massachusetts residents to such parties.
• No loans that are the subject of the settlement may be sold or otherwise assigned. Additionally, Western Sky and the Related Companies may not indicate to any consumer eligible for a loan modification that a release or discharge of any claims or causes of action must be provided in exchange for the modification.
• Western Sky and the Related Companies are permanently banned from applying for any type of license or registration issued by the Division of Banks.

Western Sky and the Related Companies also agreed to a civil penalty of nearly $390,000 along with attorneys' fees and costs totaling an additional $65,000.

The Massachusetts settlement follows on the heels of a similar settlement between Western Sky, the Related Companies and the Michigan Attorney General and Department of Insurance and Financial Services.

While harsh, the terms of the settlement with Massachusetts regulators should not come as a surprise. Massachusetts has a long history of taking action against out-of-state entities who they believe are taking advantage of Massachusetts residents. The fact that Western Sky was (at least facially) acting with the benefit of tribal sovereign immunity was of little consequence.

Thomas P. Quinn is a partner in the Fall River, MA office of Hudson Cook, LLP. Tom can be reached at 774-365-4758 or by email at tquinn@hudco.com.